The third-party liability insurance market is currently facing significant challenges. Rising nuclear verdicts, changing juror attitudes, and the growth of litigation funding are all contributing to this turmoil. This shift has led insurers to cut back on their coverage offerings, resulting in higher premiums and stricter terms for businesses seeking protection.
Vince Gaffigan, an executive at Lockton, has noted that what used to be a stable market is now marked by volatility. Insurers are reassessing their risks, which is shrinking the available market capacity and causing premiums to rise at an alarming rate. Historically, insurers have relied on past loss data to set their prices. However, with the increase in claims and costs due to social inflation, these historical estimates are no longer reliable.
Social inflation, often referred to by insurers as "legal system abuse," has intensified recently. This trend is linked to changing public views on social justice and corporate accountability. Gaffigan points out that there are now more judicial environments that support expansive legal claims, which can lead to larger awards in lawsuits. As these large verdicts gain media attention, they set a precedent that encourages even bigger awards in future cases.
The litigation funding industry, now valued at around $15 billion, has also played a role in rising costs. It provides financial backing to plaintiffs’ attorneys, which can lead to increased claim expenses. The result is a cycle where higher costs for businesses and consumers create economic inefficiencies.
As insurers face these challenges, they are adopting more cautious strategies. This includes raising attachment points for coverage and tightening their risk selection criteria. Some insurers are even pulling out of high-risk sectors like trucking and healthcare altogether. This has made it harder for businesses to find adequate insurance coverage.
For companies, this means they need to rethink their liability insurance strategies. Many are now looking at self-insurance options and alternative risk transfer methods to manage their risks better. With the market tightening, businesses may also need to engage multiple insurance carriers to secure the coverage they need, often at higher costs.
In light of these changes, businesses are encouraged to take a proactive approach to claims management. Early identification of potential claims can help save money in the long run. Gaffigan emphasizes that the best claim is one that is resolved quickly, as delayed claims typically become more expensive.
As the landscape of liability insurance continues to evolve, it’s clear that businesses must adapt to these new realities. Exploring alternative strategies and improving risk management practices will be key to navigating this challenging environment.